Impact Investing

This Elon Musk-Backed Startup's Rocky Road to Solar 'Grand Slam'

Successful investors see around corners, bank on long-term trends and shrewdly assess risk. Oh, and it also helps to know Elon Musk.

DBL Investors, a $225 million impact investment firm in San Francisco, had all of those factors going for its investment in SolarCity, now the largest solar installer in the country, worth nearly $6 billion two years after its initial public offering.

That SolarCity would become “a grand slam 10 times over,” as DBL partner Nancy Pfund put it, was anything but inevitable in 2008, when DBL first invested in the company. It certainly wasn’t clear at the time of its rocky IPO in December 2012, when the stock debuted at $8 a share, far below its earlier target price.

DBL became the first institutional investor in SolarCity at the invitation of Musk, the billionaire co-founder of PayPal and now CEO of electric-car company Tesla, and commercial space pioneer SpaceX. Musk, the cousin of SolarCity founders Lyndon and Peter Rive, put up the bulk of SolarCity’s initial round of $10 million in financing. DBL worked closely with Musk on Tesla and invested in SolarCity in 2008, its $30 million Series D fundraising round.

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“To a lot people, it looked like a bunch of solar installers. Why would you invest in it?” Pfund recalled. DBL’s due diligence confirmed that the falling cost of solar panels and the availability of government subsidies made it a national brand that could multiply its revenues with incremental costs. “The fact that this was just a bunch of roofing folks didn’t bother us.”

Lyndon and Peter Rive conceived SolarCity at the Burning Man arts festival in 2006, and it became one of the earliest U.S. companies to popularize solar leasing, giving skittish customers a virtually risk-free proposition. SolarCity installs solar systems for free in return for a power purchase agreement that offers customers a 10 percent to 15 percent discount on their utility bills.

The model depended on federal tax-credits for solar installations. Since SolarCity owns the system, it could bundle the credits into tax-equity funds that attract corporate buyers. The buyers get a 30 percent federal tax credit, along with portions of lease payments. SolarCity has raised nearly two dozen investment funds through which $1.57 billion has been committed. (The tax credits legislation expires in 2016.)

Demand for tax-credits dried up in the Great Recession. At the same time, the bloom came off of clean-tech, generally, with the notorious bankruptcy of Solyndra, a manufacturer of solar energy modules, and a broader shakeout of solar panel producers caused by plummeting prices and competition from China.

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But what was bad for solar-panel manufacturers was good for solar installers like SolarCity -- and for consumers. Panel prices have dropped 60 percent since 2011 and continue to fall. Residential solar installations have grown at an annual rate of 70 percent for the past five years. Last year, new photovoltaic panels installed in the U.S. had the capacity to generate up to 4.2 gigawatts of electricity, about as much as four nuclear reactors.

SolarCity raised more than $500 million in equity financing prior to its IPO, according to CrunchBase. Other investors included venture capital firm Draper Fisher Jurvetson. In 2011, SolarCity won a five-year, $1 billion government contract to install solar panels on 120,000 buildings at 124 military bases, funded entirely by the private sector.

None of that was enough to overcome solar skeptics of the company’s IPO. “The world hated solar. They didn’t understand it. They thought we were a module company,” Pfund recalls. The company had hoped to raise $210 million through its IPO; it ended up with $92 million. The opening share price was ratcheted back from $13 to $15 a share to $8. Musk stepped in to buy $15 million of the shares and DBL an additional $2 million to bolster the stock.

Since then, the share price has climbed to near $70. SolarCity’s market share is also increasing, with more than 26 percent of the residential solar market. That’s higher than the next eight solar rivals combined.

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Last year, SolarCity arranged $500 million in lease financing with Goldman Sachs, the biggest such arrangement ever for U.S. residential rooftops. It announced an agreement with Honda to provide car buyers with home solar systems at little or no upfront cost. The company also entered the crowdfunding arena, scooping up startup Common Assets, and acquiring its software that allows individuals and smaller companies to invest in solar panels.

SolarCity is now piloting a plan to provide Tesla battery packs to SolarCity customers. The batteries will allow customers to store electricity during peak production and use it during dips, smoothing solar power production and helping stabilize the grid.

DBL has earned a handsome return on its investment in SolarCity. “We saw the opportunity early, that traditional investors would not have seen,” Pfund says. “Not every company will be as big and successful, but we want to have some of them. They are the role models for the next company. The whole ecosystem for entrepreneurial companies depends on having some big successes.”


Financial: SolarCity has yet to become profitable, but deployments continue to grow. The company had more than 141,000 customers at the end of June, more than double a year earlier. It aims to deploy more than 500 megawatts of solar-generating capacity in 2014 and 1,000 megawatts in 2015.

Social and Environmental: SolarCity has installed solar systems at more than 400 schools, avoiding more than 80 metric tons of carbon. According to the company, the Chico Unified School District in California will save more than $3 million over 20 years.

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Produced by ImpactAlpha and the Case Foundation.

One of a series of impact profiles produced in conjunction with the Case Foundation’s new publication, “A Short Guide to Impact Investing.”